Are Natural Resources a Curse or Boon?

February 19, 2004

Many economists argue that an abundance of natural resources is a "curse" for developing nations. Economists Jeffrey D. Sachs and Andrew M. Warner in 1995 showed a strong statistical relationship between resource abundance and slow economic growth.

They argue that natural resources like oil -- which tend to be owned or controlled by governments -- encourage corruption, undermine institutional development, lead to overvalued currencies and cannot support long-term growth because the reserves eventually run out. Thus oil-rich nations like Iraq and Venezuela are poor or in decline.

One recent study explicitly concludes that poor institutional development, including weak governance and property laws, is "intrinsic" to nations with oil and other minerals.

However, Gavin Wright and Jesse Czelusta, of Stanford University, believe these problems are not inevitable. For instance:

America economic supremacy in the late 1800s occurred as it became the leading producer of iron ore, lead, coal, copper, zinc, timber, zinc and nickel.

Britain was notably rich in coal reserves, not to mention wool for its critical textile industry.

Natural resource reserves are rarely depleted as rapidly as expected as new mining and processing methods are discovered; thus Australia's reserve base has expanded even as its minerals production has increased sharply.

Environmental degradation limits economic growth, but new processes have minimized and even reversed harmful effects.

Furthermore, a new study measuring resources per capita or per worker by World Bank economist William F. Maloney, published in Economia -- finds no telling relationship between abundance of reserves and slow growth.

In a 1997 paper, Wright and Paul A. David point out that America invested heavily in mineral exploration, new techniques and mining education. Other industries received spillover benefits from new technologies, the low costs of natural resources and a technically trained labor force.

Source: Jeff Madrick, "Resources Form the Basis for Economic Growth," Economic Scene, New York Times, February 19, 2004; see also Gavin Wright and Jesse Czelusta, "Mineral Resources and Economic Development," October 2003, Stanford University.